Should wages be subsidized in a pandemic?

We use a labor search model with heterogenous households and firms to study the efficacy of a wage subsidy during a pandemic, relative to enhancing unemployment benefits. A large proportion of the economy is forced to shut down, and firms in that sector choose whether to lay off workers or keep them...

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Bibliographic Details
Published in:Macroeconomic dynamics 2023-09, Vol.27 (6), p.1549-1580
Main Authors: Abbott, Brant, Phan, Nam Van
Format: Article
Language:English
Subjects:
Business cycles
Coronavirus Aid Relief & Economic Security Act 2020-US
Cost control
Economic recovery
Economic theory
Employment
Labor market
Layoffs
Macroeconomics
Pandemics
Productivity
Small business loans
Subsidies
Unemployment benefits
Unemployment insurance
Wages & salaries
Workers
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Summary:We use a labor search model with heterogenous households and firms to study the efficacy of a wage subsidy during a pandemic, relative to enhancing unemployment benefits. A large proportion of the economy is forced to shut down, and firms in that sector choose whether to lay off workers or keep them on payroll. A wage subsidy encourages firms to keep workers on payroll, which speeds up labor market recovery after the pandemic ends. However, a wage subsidy can be costlier than enhancing unemployment benefits. If the shutdown is long or profit margins are low, then a wage subsidy is preferable and vice versa. The optimal mixture of policies includes a wage subsidy that covers 90 $\%$ of the first $200/week of earnings and expands unemployment benefits to cover all salary up to $275/week. Low-income workers, as well as those in less productive jobs, benefit the most from a wage subsidy.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100522000335